Saving for your first home can seem like a daunting task and it often begins with saving for your down payment. A down payment on a home is ideally 20% of the market selling price of the home; it’s at this amount that you can usually avoid paying private mortgage insurance (PMI), an additional monthly cost for borrowers who put down less than 20%.
Before you start to save, do your research on the kind of home you would like to purchase and the area you would like to live. Study median market prices to estimate the amount you would need for a down payment.
A California mortgage calculator can help you estimate your monthly payments including principal and interest, property taxes, homeowner’s insurance, and private mortgage insurance (if applicable). Consulting a mortgage calculator is a good first step to understanding the true cost of owning a home and planning your budget accordingly.
5 Steps to Start Saving for a Home
1. Prepare a Budget: You need a realistic view of how much you can afford to save. Factor in essential expenses like your current rent, groceries, car payments, and auto insurance to get a more accurate view of your financial situation. Plan to set aside any extra money to put towards a home purchase.
2. Pay Down Your Debts: Ideally your housing costs should not exceed more than a third of your total income. Other debts such as student loans, car loans, and credit cards can affect the amount of money you can put toward your down payment. A high level of debt can also make it difficult to get the best mortgage rates. Once those debts are paid you can begin saving that money. It is wise to reduce debt first to alleviate financial pressure before securing a mortgage.
3. Pay Your Future Mortgage: Another helpful way of preparing to pay a mortgage is to start setting aside money in your savings account as though you are already paying it. You can do this by putting the difference between your rent and your estimated mortgage payment into a savings account.
4. Reduce Your Expenses: Calculate your current expenses and try to reduce them by 10%. Cancel any subscriptions you may not be using, try to cut down on restaurants and entertainment spending, and forego luxury items. Consider taking a break from the gym to exercise at home and trim your clothing budget down. Put this 10% into your savings account.
5. Get a Side Hustle: Boost your income by getting a side job. This could be something as small as babysitting, dog-walking, or tutoring. Put any money you make from this into your savings account.
While saving for your first home can seem like an extremely daunting task, it doesn’t have to be. By creating a budget and sticking to it, you are actively taking steps to achieve your goal of homeownership.